Global Economic Downturn and Potential Impact on Developing Economies like Zambia October 23, 2008

Global Financial Crisis: How Might it affect Developing Countries  Could have an impact through different channels: –Through direct exposure to global financial markets –Through commodity prices –Through global slowdown and increased risk aversion  Through this summer, the overall impact of the financial market turmoil and slowing growth in high income countries was manageable and most developing countries continued to perform reasonably well.  Challenges have now increased and financial difficulties in the U.S. in recent weeks has intensified these challenges

What is happening in Global Financial Markets?  Recent developments have tightened credit conditions throughout the world  Massive market capitalization losses in investment banking –About $500 billion decline in market capitalization since October 2007  Consolidation of broker-dealers and commercial banks; end of stand- alone investment banks in the U.S.  U.S. government plan to remove bad debt from banks’ balance sheets. “Nationalization” of Fannie Mae, Freddie Mac; AIG Stock market price indices (June 2007 = 100) S&P 500 Financials Source: Bloomberg.

Emerging market equity prices have declined in line with mature markets... Index (Jan = 100) Emerging markets Mature markets MSCI equity price indexes Source: MSCI & IFC. % change in equity prices since Oct, 2007

For much of Africa  Direct exposure to the subprime-related distressed credit products of the U.S. and Europe appears to be limited  Direct exposure of troubled U.S. or European banks could lead to downsizing of subsidiary operations in developing countries by weakened parent banks and/or difficulties for domestic banks with direct exposures

Foreign banks play a dominant role in some developing countries… Market share of assets (right axis) Number of foreign banks (left axis) Hungary94%; Mexico 82%; Indonesia 28%; Brazil 25%; India 5%; Thailand 5% Percent Number of countries with exposure A single bank having a dominant share in some countries, e.g. Citibank - 21% in Mexico or Barclays - 26% in Botswana Source: World Bank staff estimates based on data from Bankscope.

…particularly in higher-risk countries Emerging market (EMBI Global) sovereign bond spreads Source: JPMorgan.

August 2007 Bank lending, bond and equity issuance Jan – Aug Bank lending Equity issuance Bond issuance Private debt and portfolio flows to developing countries moderating but FDI remains strong Source: DEC Prospects Group. $ billions (12-month moving average) FDI inflows to 25 developing countries 2002H1 – 2008H1 $ billions

Net private debt and equity flows , projected Percent of GDP Percent of GDP (right axis) Private capital flows expected to decline $990 bn in 2008 $895 bn in 2009 Base case Low case Source: DEC Prospects Group.

What is happening with Commodity Prices?  Most commodity prices have fallen substantially as economic growth and demand slow  Oil prices have declined sharply in response to slower demand growth in the U.S. and OECD and increased OPEC supplies  Food prices are expected to fall on good supply prospects and weaker oil prices. However, prices will remain historically high and continue to be a major concern  Metals and mineral prices have weakened as supplies have increased and are expected to decrease further while demand weakens. China’s demand will be critical to prices

US Oil Demand and World Oil Prices kb/d 3-mo moving average (y/y) Source: U.S. EIA, Datastream and DEC Prospects Group. Brent Dubai $/bbl

Commodity Prices $/ton Grain Prices Source: DEC Prospects Group. Oilseed Prices $/ton

Metals prices fall on increasing concerns about demand $/ton Zinc Copper Source: LME and DEC Prospects Group. Nickel

Commodity Price Forecast $/barrel Oil Source: DEC Prospects Group. Index (2000 = 100) Metals & minerals

Industrial production & Imports declining United States High-income OECD Annual growth of import volumes Percentage change (3m/3m) Source: DEC Prospects Group. Annual growth of industrial production Developing countries High-income OECD Percentage change (3m/3m) Developing Ex. China

Inflation has surged Developing countries High-income OECD Median inflation rates Jan 2000 to July 2008 Percentage change (12m/12m) Source: DEC Prospects Group. Inflation (left axis) GDP growth (right axis) Median inflation and real GDP growth 1965 to 2007, projected Percentage change (12m/12m) Inverse long-term correlation between inflation and growth

Should investment retrench growth could be much diminished High-income OECD Developing countries Real GDP growth 2000 to 2007, projected Percent “Zero investment growth” Source: DEC Prospects Group.

Sharply lower developed country and world growth

Protecting the most vulnerable

Zambia: Fortunes linked to Copper

Per capita GDP is half 1970 levels but there has been a dramatic increase in investment levels due to copper prices

Rural Poverty Remains a Challenge  The copper boom has fuelled growth that is urban centric – as a result, good recent progress in reducing urban poverty  No progress in reducing rural poverty  Gap between urban and rural areas widening

Zambia: Poor Track Record of Managing Booms

Entering a period of Uncertainty

Implications Going Forward  Dutch Disease: Managing fiscal, monetary and exchange rate policy wisely  Managing Volatility: design, management and governance of the copper fund  Maximizing fiscal impact: Need to use scarce fiscal resources for maximum development impact  Transparency and Accountability: Extractive Industries Transparency Initiative